Why tax isn’t coming down any time soon

In the run-up to The Budget, posturing and discussion will always dominate the headlines. What tax should go?Which should stay?Who should pay more? And what loopholes should close? Although, for many reasons, the tax burden should be reduced. It won’t be.

Wages have not increased to take account of the rises in taxation that we have seen. One of the ways in which a government can get away with a tax cut is if the economy grows significantly after that cut comes into play. We saw it in the early 1980’s, the mid 1980’s and again in the early 1990’s. Higher tax was followed by inflationary periods that were reflected in wage inflation. This time around, that hasn’t happened. Wages are flat and should the government cut tax the increase in receipts simply wouldn’t match the cost of reducing the rate. It goes against most economic theory (particularly peddled by the cutting too far too fast brigade) but that’s the reality.

Which is why there is talk of reducing corporation tax. If you increase the profitability of companies, they in turn can invest and ultimately pay their staff more. As and when wage inflation comes back into the market so spending increases. When that finally occurs, the economic cycle begins. If you then cut government spending and bring in tax cuts a glut of money becomes available and you really kick-start the economy. We simply aren’t at that point yet.

There are many arguments raging about tax at the moment. Perhaps the most important thing for government to do is to simplify the system. At over 11,500 pages the UK tax code handbook is not only one of the longest in the world it’s also one of the most complex. You can thank Gordon Brown for that. He did it because he wanted you not to notice he was doing. New Labour had promised not to raise the income tax rates. And indeed they didn’t. To fund their massive increases in public spending and employment they had to do something. And they did. They burdened the taxpayer with salami slicing of every kind of earning, investment, saving, travel and other taxes so perhaps you would not notice what they were doing. And for a while you didn’t.

However what we have now are a range of taxes that are storing up problems for the future. Setting aside the high level of VAT which should only be there if you reduce income tax or the 50 pence tax rate which when combined with National Insurance (income tax with another name) makes for a self defeating tax in many ways… there are a number of taxes that should go.

Stamp Duty on your main home is one of the reasons the housing market is stuttering. Some may say that if you own an expensive house, so you should pay tax on its purchase. Yet with a market that is sluggish it means every time you move, you lose capital. Do that too many times and unless you are earning a lot or the market is rising, the tax reduces your capital. The upshot of that is that people are not moving. Fine, you might say. If people don’t move, supply constrains and the market becomes clogged. Worse than that when people move they spend. That just isn’t happening at the moment.

The opposition wants to maintain tax credits and cut various forms of tax for the lowest paid in society. Laudable but funded by what exactly? Another attack on pensions? Believe it or not, that would hit middle income people. Again. Why? As you all know just because you have a lot of money it doesn’t mean you will live any longer. The pension system works on the basis that some will overpay which funds those who underpay. It’s quite a neat system as it levels out the laws of averages and helps sustain a system for paying people when they stop working. Yet if you drain from the very top by reducing tax concession you take away the ability to fund pensions. Take too much out of the pot and the system will fail. In the past 20 years the UK’s pension system has been systematically raided. As it is money in the future and people don’t tend to worry too much about things that are far away, no one noticed. It’s a national scandal that savings have been plundered in this way. It’s also a time bomb waiting to go off. We are living longer and that extra cost hasn’t been factored into the system.

As a result of the complexity of our tax system and the multiple pieces of tax you pay in different forms, the UK is over taxed. It’s expensive and redistributing wealth in a way we have never seen before. Part of the way we get out of this is to improve financial literacy to ensure that you know what the government is doing. The other aspect is having a greater understanding about those who earn the most paying the most. The more money you have the more ability you have to shift yourself, your family and your business elsewhere. Whilst that may not be “fair” it’s reality. After all if you could reduce your tax bill you would.

The way we get out of this mess is to reconsider what tax is there to do. It is there to pay for the services we need. It isn’t and shouldn’t be there to give money to the have not’s willy-nilly. We also should be far more protective of our investments and savings allowing individuals to become more self-sufficient so reducing the requirements and burdens on the state. In addition to that we should stop assuming that because the demand for fuel is inelastic that you can simply tax it some more. And finally it’s about time companies stopped taking advantage of their workers. I am all for big rewards for people who succeed. However I am also a big supporter of ensuring that those who really do the work get rewarded too. It should not just be for the people at the top to take unless they are prepared to reward the people who helped them perform.

In the meantime let’s hope that we can really cut the burden of too much tax. Encourage and reward investment and hard work and once and for all remove the scourge of taxation that feeds the venomous beast that is envy.